[co-author: Ben Cantor – Law Clerk]
On August 12, 2022, the United States Congress passed the Cutting Inflation Act of 2022 (the “Act”), which was signed into law by President Biden on August 16, 2022. Along with sweeping changes in energy policies , environmental and health, the law creates a new 15% alternative minimum corporate tax (“AMT”), imposes a new 1% excise tax on certain corporate share buybacks and extends for two years limitation of excess business losses of unincorporated taxpayers.
Key points to remember
- The 15% AMT generally applies to US corporations with financial statement revenues exceeding $1 billion, measured by aggregating the financial statement revenues of sufficiently related entities.
- Due to last minute changes to the Act, it appears that the corporate portfolio investments of private equity funds will not be treated as a single group for this purpose and therefore each of these portfolio companies will likely only be subject to AMT if it separately exceeds $1 billion in revenue in the financial statements.
- Share buybacks by publicly listed companies are subject to a 1% excise tax, with potential implications going beyond simple buybacks (for example, certain tax-exempt transactions may be subject to the tax ).
- The limitation on excess business losses for non-corporate taxpayers has been extended for two years.
Alternative Minimum Corporate Tax
The AMT potentially applies in any tax year to any “applicable company”, i.e. any company that satisfies the “adjusted financial statement result” (“AFSI”) test for an or more previous tax years. Covered companies do not include S corporations, real estate investment trusts or regulated investment companies. An applicable corporation must generally pay the greater of the AMT or its regular corporation tax.
The AFSI test is generally satisfied for a tax year if the company has an average AFSI greater than $1 billion in the three tax years preceding the tax year being tested. For a calendar year company whose tax year being tested ends on December 31, 2023, the AFSI test could be satisfied for 2023 based on the average AFSI over the period comprising 2020, 2021 and 2022. – parent groups may be subject to AMT if the foreign group meets the average AFSI test of $1 billion and the domestic subsidiary (or an unincorporated business) additionally meets an average AFSI test of 100 millions of dollars.
Once a company satisfies the AFSI test to be an Applicable Company, it will generally remain an Applicable Company for years to come, although the law allows the United States Department of the Treasury to determine the rules for ceasing to be an Applicable Company. an applicable company if the AFSI test is not met for a certain number of periods. A change in ownership may also cause a corporation to cease to be an applicable corporation.
The AFSI is calculated using the aggregate book income of any group of entities grouped together as a “single employer” for tax purposes, with a wide range of adjustments. Generally, entities are combined if they are controlled by a common parent company or if they are controlled by five or fewer persons who are individuals, estates or trusts. Partnerships that are not engaged in a trade or business (such as private equity funds) are generally not required to combine their subsidiaries, but partnerships with sufficiently concentrated ownership may end up owning applicable companies. Partnerships engaged in a trade or business may be grouped with related corporations. The Act was amended to remove certain provisions under which combined entities would be controlled by a partnership even if that partnership is not engaged in a trade or business.
The AMT is applicable for tax years beginning after December 31, 2022.
Excise tax on share redemptions
The law also imposes a 1% excise tax – payable by the redeeming company – on the fair market value of any shares redeemed by a US corporation whose interests are publicly traded on an established stock market and certain US subsidiaries of corporations foreigners with similar interests. listed on the stock exchange. Repurchases include refunds and all other transactions determined by the United States Department of Treasury to be economically similar. The fair market value of the redeemed shares is offset by the fair market value of the shares issued by the company during the same taxation year. Exceptions to the 1% excise tax include redemptions that are part of tax-exempt reorganizations in which no gain or loss is recognized by shareholders, transactions where the total value of shares redeemed during the tax year does not exceed $1 million, redemptions by a regulated investment company or real estate investment trust, and redemptions treated as dividends for US federal income tax purposes.
The term “buy-out” has been broadly defined in the statute and, in the absence of regulatory guidance, the 1% excise tax could potentially apply to spin-off transactions and other transactions that are not not traditionally considered share buybacks, such as fractional share payments. and payments to dissenters in exchanges that are part of tax-free reorganizations.
Any excise tax payment is not tax deductible. Excise tax applies to share redemptions after December 31, 2022.
Business losses of non-corporate taxpayers
The law also extends the excess business loss limitation for non-corporate taxpayers for two years. Excess business losses are the amount by which business deductions exceed gross business income. Prior to the Act as well as the enactment of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the excess business loss limitation applied to any tax year beginning after 31 December 2017 and before January 1, 2026, limiting the ability of non-corporate taxpayers to offset net business losses to $250,000 of non-business income for single filers, including trusts , and $500,000 for joint filers (these amounts being indexed to inflation). The CARES Act amended the excess business loss limitation, making it applicable to tax years beginning after December 31, 2020 and before January 1, 2026. The American Rescue Plan Act of 2021 further extended the expiration date of one year, that is, by years commencing before January 1, 2027. The Act further extends the application of the excess business loss limitation rules to taxation years commencing before January 1, 2029.